Buyer Beware: GrubHub Touts Misleading 67% Growth Rate In IPO Filing

Online food ordering service GrubHub (formerly GrubHub Seamless) filed paperwork on Friday for an initial public offering up to $100 million and released numbers showing its recent growth in users and revenue. In GrubHub’s S-1 filing, the company touts a stellar 67% revenue growth rate.

Not so fast. While Reuters, The New York Times, and many others (including Forbes initially), reported that much-hyped 67% revenue increase as fact, it obscures the exact growth rate generated by the merger of former competitors GrubHub and Seamless.

Prospective IPO buyers should know that to arrive at its impressive growth figures GrubHub (the combined company) compared apples to oranges. It boasts 2013 revenue of $137.1 million, which includes 12 months of sales generated on the Seamless platform plus about 5 months of sales generated on the GrubHub platform after the completion of the merger on August 8, 2013. The 2012 revenue figure of $82.1 million, by comparison, only includes Seamless’ 2012 results. It doesn’t include any sales at all from the GrubHub platform in 2012, making the 67% growth rate effectively meaningless.

The key to understanding why GrubHub promotes this number is to figure out the separate 2013 revenues for each platform. The S-1 lists pro forma combined 2013 revenue of $170.1 million, with $32.9 million in GrubHub platform sales prior to the August 8th merger close. Add the $26.3 million from after the merger and you see that in 2013, the GrubHub platform generated just $59.2 million in revenue. Thus, the Seamless platform generated about $110.9 million in revenue on its own. We can then calculate the a real apples-to-apples comparison of revenue growth for the Seamless platform alone, which went from $82.1 million to about $110.9 million last year. That’s an increase of only 35.1%.

Only buried deep in the S-1 can we find the real pro forma combined revenues for 2012. On page F-17, GrubHub lists it as $118.9 million. Doing some math, we see that 2012 GrubHub platform sales were $36.8 million in 2012 and the more accurate overall growth rate for the combined company from 2012 to 2013 was just 43%, a far cry from the 67% the company advertises at the top of its filing.

Like many other tech companies before it (see especially Groupon), GrubHub is fiddling with its numbers to present its most favorable public face ahead of its IPO. The company wants potential investors to think it grew at a 67% rate last year, even though in truth it was much less.

That’s disappointing. There’s already plenty for investors to like in GrubHub’s S-1 filing, including accounts with more than 28,000 restaurants and over 135,000 average daily food orders. Mobile device orders made up 43% of all placed in the fourth quarter of 2013. But it looks like GRUB, as the company will soon be known on the New York Stock Exchange, got greedy.

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Hmmm, GrubHub looks like it could be a very challenging IPO. It’s a bunch of private equity firms that are trying to sell it to the public at the top of the market based on only 5 months of combined results. There is a good analysis that looks like it came from an insider at the truthorfinance.com site. Link below and worth a read (it get into the organic versus acquired revenue issues) if you are thinking about investing.

There are a number of other red flags: the company only shows the net number of subscribers and restaurants using their service and doesn’t tell investors about the underlying trends in those numbers (how many stopped using it, for example). The truthorfinance.com site goes into quite a bit of detail on this and and some other red flags. It’s a hold until we get more info on the valuation

Good Job Brian! I got interested in this IPO coming up April 4th. Then the disappointment. This is a simple case of overvaluation from the start as a result of too many total shares outstanding 78+ million. The lead underwriters had me going when I saw 7 million shares being offered (the current median offering for most successful IPO’s). Because of the affiliation in the food services this IPO shouldn’t start at a market cap above $500 million. It’s being valued as a food “cloud services” company, and I didn’t see the fashionable “cloud” word anywhere in the S-1.